High Court Of Bombay
CIT vs. Kotak Mahindra Finance Ltd.
Sections 32(1), 234B, 234C, RULE Appendix I, Part I, Entry III(2)(ii)
Asst. Year 1989-90
S.H. Kapadia & J.P. Devadhar, JJ.
IT Appeal No. 251 of 2002
30th April, 2003
Counsel Appeared
R.V. Desai & P.S. Jetly, for the Appellant : F.V. Irani & A.K. Jasani, for the Respondent
JUDGMENT
S.H. Kapadia, J. :
Being aggrieved by the judgment and order dt. 20th Aug., 2001, passed by the Tribunal in IT Appeal No. 9987/Bom/1992 for asst. yr. 1989-90, the Department has come by way of appeal under s. 260A of the IT Act. This appeal is a cross-appeal to IT Appeal No. 77 of 2002, which appeal was preferred by the assessee whereas, the present appeal is preferred by the Department.
Facts
2. The assessee is a leasing and financing company having its income from lease rent, bill discounting and service charges. During the course of hearing before the AO, certain issues were raised. One of the issues was concerning depreciation. The assessee was allowed normal depreciation on trucks, buses and motor vans leased out to its customers. However, the assessee had claimed higher depreciation at 50 per cent of the written down value on the said vehicles. As stated in our judgment in IT Appeal No. 77 of 2002, the Tribunal took the view that the assessee was not entitled to higher depreciation by merely leasing out the above vehicles. That, the assessee did not run the vehicles on hire and nor does the assessee carry on the business of running them on hire. Therefore, the Tribunal took the view that higher depreciation cannot be allowed. This view of the Tribunal has been affirmed by us in our judgment in IT Appeal No. 77 of 2002. However, the Tribunal came to the conclusion by placing reliance on the judgment of the Supreme Court in the case of CIT vs. Shaan Finance (P) Ltd. (1998) 146 CTR (SC) 110 : (1998) 231 ITR 308 (SC) that the assessee would be entitled to higher depreciation if its lessees had used the vehicles in the business of running them on hire and, consequently, the Tribunal remitted the matter back to the AO to ascertain whether the vehicles leased out by the assessee were used by the lessees in the business of running them on hire. It is against this finding of the Tribunal on the alternative plea of the assessee that the Department has come by way of appeal to this Court with two questions, one of which is as follows :
“1. Whether the Tribunal was justified in holding that if the lessees of the assessee had used the motor trucks, buses and vans in the business of running them on hire then, the assessee was entitled to higher rate of depreciation ? If so, whether the Tribunal was justified in remanding the matter back to AO to ascertain whether the motor trucks, buses and vans leased out by the assessee were used by the lessees in the business of running them on hire ?”
We now propose to answer this question. However, before we come to the arguments, we would like to quote the entry in Appendix I. “III. Machinery and Plant (1) Machinery and plant other than those covered by sub-items (2) and (3) below **** (2)(i) Aeroplanes-Aeroengines (ii) Motor buses, motor lorries and motor taxis used in a business of running them on hire.”
Arguments
3. Mr. R.V. Desai, learned senior counsel appearing on behalf of the Department submitted that in this case, the Tribunal has held in favour of the Department. That, in this case the Tribunal has held that the word “lease” cannot be read as the word “hire” in the above entry. That, the assessee was in the business of leasing and financing. That, its income was from lease rent, service charges and bill discounting. That, the assessee was not in the business of running the vehicles on hire and merely because the assessee had leased the vehicles, it cannot be stated that the assessee had used the vehicles in the business of running them on hire. Mr. R.V. Desai submitted on behalf of the Department that in view of the above conclusion, the Tribunal should not have remanded the matter back to the AO as the entry contemplated use of the vehicles in the business of running them on hire and since, the assessee was not in such a business, the entry had no application and, consequently, the assessee was not entitled to higher depreciation. Mr. Irani, learned counsel appearing on behalf of the assessee contended that one has to look at the object of the above entry. He contended that even if the word “hire” in the said entry cannot be equated to a “lease” still if the assessee proves that the lessees had used the leased vehicles in the business of running them on hire, the assessee would still be entitled to a higher depreciation. In other words, the assessee had invoked the test of end-user as laid down by the judgment of the Supreme Court in the case of Shaan Finance (P) Ltd. (supra). This argument was accepted by the Tribunal. The Tribunal has remanded the matter back to the AO to decide this issue on facts. Findings At the outset, it may be mentioned that in this case, the AO has granted normal depreciation. Therefore, we are not required to go into the question as to whether the transactions entered into by the assessee were genuine or fake. The genuineness of the transactions was never challenged. The Department has accepted that the assessee was in the business of leasing and financing and that, in the course of business, the assessee had leased out the vehicles to its customers/lessees. The vehicles are owned by the assessee. The assessee is not using those vehicles itself. The assessee earns lease rent by letting out those vehicles and by allowing the lessees to use those vehicles. The assessee did not run those vehicles on hire nor does it carry on the business of running them on hire. However, if the vehicles were used by the lessees in the business of running them on hire then the matter certainly needs re-examination by the AO because, one has to look to the purpose and object of the above entry. As laid down by the Madras High Court in the case of CIT vs. Madan & Co. (2002) 174 CTR (Mad) 172 : (2002) 254 ITR 445 (Mad), vehicles, which were let out to the hirers/lessees who are in the business of running them on hire, are likely to undergo rough use as compared to vehicles owned by and used for personal purpose of the owner. It is in recognition of this fact that hire rate of depreciation is provided for. In the circumstances, we do not wish to interfere with the order of the Tribunal remanding the matter back to the AO to decide whether the lessees were in the business of running the vehicles on hire. Hence, the above question is answered in the affirmative i.e., in favour of the assessee and against the Department. The second question which arises for consideration in this case is as follows :
“2. Whether, on facts and circumstances of this case and in law, the Tribunal erred in the holding that interest under s. 234B and s. 234C was not leviable in case income was subjected to tax under s. 115J as it stood at the relevant time ?”
Facts
6. This appeal is preferred by the Department against judgment and order of the Tribunal dt. 20th Aug., 2001, in IT Appeal No. 9987/Bom/1992 for the financial year ending 31st March, 1989, relevant to the asst. yr. 1989-90. It may be mentioned that the accounts of the company under Sch. VI of the Companies Act were duly finalized on 22nd June, 1989. That, as per the provisions of the IT Act, the assessee returned its income of Rs. 52,86,939 on which the assessee paid the total tax of Rs. 30,53,207 less TDS. In other words, on taxable income of Rs. 52,86,939, the assessee had to pay Rs. 14,55,158 as per computation under the IT Act. As against Rs. 14,55,158, the assessee paid Rs. 15 lacs by way of advance tax on 15th March, 1989. However, as per the provisions of s. 115J of the IT Act, the taxable income stood at Rs. 73,47,279 on which the tax liability was Rs. 26,45,004 after taking into account the TDS. As stated above, as against the tax liability of Rs. 26,45,004, the assessee had paid advance tax of Rs. 15 lacs on 15th March, 1989. Therefore, there was a short payment of tax to the tune of Rs. 11,45,004. The accounts were finalized under Sch. VI of the Companies Act on 22nd June, 1989, and on 29th June, 1989, i.e., within 7 days, the assessee paid self-assessment tax of Rs. 11,64,200. In the circumstances, the above facts show that under the normal provisions of the IT Act the assessee had paid the full tax. That, under the normal provisions of the IT Act, the assessee had paid an advance tax of Rs. 15 lacs on 15th March, 1989, which covered the full amount of tax of Rs. 14,55,158. However, in view of s. 115J of the IT Act, the tax liability increased from Rs. 14,55,158 to Rs. 26,45,004 and, therefore, there was a short payment of tax to the tune of Rs. 11,45,004. The Department has, therefore, invoked provisions of s. 234B and s. 234C of the IT Act. It is against this levy of interest that the matter has come by way of appeal to this Court with the abovequoted question No. 2. Scope of s. 234B and s. 234C of the IT Act.
7. Sec. 234B and s. 234C fall under Chapter XVII of the IT Act which deals with collection and recovery. Chapter XVII-F deals with interest chargeable in certain cases. Sec. 234B along with s. 234A and s. 234C were inserted by Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1st April, 1989. It is well settled that interest under s. 234B is compensatory in character. It is not penal in nature. So also, interest under s. 234C is compensatory in character. It is for this reason that s. 234B does not envisage grant of hearing insofar as levy of interest is concerned. The levy is automatic on it being proved that the assessee has committed a default as governed by s. 234B. This reasoning also applies to levy of interest under s. 234C. Therefore, the question of equity, rules of natural justice and justification for not making payment do not arise for determination in cases where interest is leviable under s. 234B and s. 234C. In this case, we are concerned with asst. yr. 198990. Sec. 234B makes provision for charging of interest for non-payment or short payment of advance tax. The provision is compensatory in nature. It has no element of penalty in it. Issue Whether interest under s. 234B and s. 234C is chargeable even in a case where tax liability arises only by applicability of s. 115J ?
Arguments
8. Mr. R.V. Desai, learned senior counsel appearing on behalf of the Department contended that Chapter XVII-C deals with advance payment of tax. He invited our attention to ss. 207 and 208 of the IT Act. He contended that s. 207 refers to liability for payment of advance tax. He contended that under s. 207, tax shall be payable in advance during any financial year in accordance with ss. 208 to 219 in respect of the total income of the assessee which would be chargeable to tax for the assessment year immediately following the previous year. He submitted that s. 207 has equated total income of the assessee with the current income whereas, s. 208 of the IT Act refers to conditions of liability to pay advance tax. He contended that s. 207 must be r/w s. 208 and, if so read, it is clear that where the assessee had a current income, the assessee is liable to pay advance tax under s. 207 which in turn refers to estimation of current income by the assessee whereas, s. 208 refers to computation of advance tax which has to be done under ss. 208 to 219. He, therefore, contended that s. 207 imposes liability for payment of advance tax whereas, s. 208 refers to computation of advance tax in accordance with Chapter XVII of the IT Act. He contended that the liability for payment of advance tax is in respect of total income of the assessee during the current year and, therefore, that liability cannot exclude provisions of s. 115J. He contended that when the assessee is required to estimate its current income, all provisions of the IT Act as applicable to the assessee, including s. 115J, are attracted. He, therefore, contended that s. 115J cannot be left out while estimating the current income. In the circumstances, it was argued that the Tribunal erred in holding that interest under s. 234B and interest under s. 234C was not leviable in cases where income was subjected to tax under s. 115J. In this connection, reliance was placed on the judgment of the Gauhati High Court in the case of Assam Bengal Carriers Ltd. vs. CIT (2000) 162 CTR (Gau) 170 : (1999) 239 ITR 862 (Gau). He also relied upon the judgment of the Madhya Pradesh High Court in support of his contention in the case of Itarsi Oils & Flours (P) Ltd. vs. CIT (2001) 170 CTR (MP) 158 : (2001) 250 ITR 686 (MP). He contended that the entire concept of advance tax was that the assessee must pay the tax during the financial year when he earns income because, in a cost push economy, the money value falls each day and, therefore, whether the assessee is assessed under normal provisions of the IT Act or under s. 115J of the IT Act was immaterial.
He contended that once an assessee earns income in the current year then, he would be liable to pay the advance tax under ss. 207 and 208 of the IT Act. He contented that the scheme of advance tax under Chapter XVII-C is that it shall apply to all assessees irrespective of the fact whether they have assessed under normal provisions of the IT Act or under s. 115J of the IT Act. Mr. Desai vehemently urged that s. 115J had nothing to do with the payment of advance tax and if advance tax, is not paid or short paid then, interest under s. 234B and s. 234C which is compensatory in character shall apply. That s. 234B and s. 234C have not carved out any exceptions to s. 115J of the IT Act. He, therefore, contended that in this case both ss. 234B and 234C are applicable. Mr. Irani learned counsel appearing on behalf of the assessee on the other hand contended that assessment under s. 115J is assessment of deemed income and therefore, s. 115J provides for a legal fiction to assess what is called as deemed income. He contended that it is well-settled principle of interpretation that legal fiction should be strictly read and, it so read, provisions of s. 234B and s. 234C will not apply to cases of assessment of income under s. 115J of the IT Act. He contented that in this case, one has to keep in mind the legislative intend. He submitted that if one reads s. 207 of the IT Act, it is clear that obligation to pay advance tax arises only during the financial year and it is for this reason that advance tax is made payable during the financial year. In this connection he placed reliance on s. 207 and s. 208 of the IT Act. Mr. Irani contended that s. 207 and s. 208 come under Chapter XVII-C whereas, s. 115J comes under Chapter XII-B which deals with determination of tax in certain special cases. He contended that under s. 115J every assessee had to compute total income firstly under the normal provisions of the IT Act and thereafter, the assessee had to compare the said total income with the figure of book profits and only if the total income computed under the normal provisions of the Act was less than 30 per cent of the book profits then, the total income shall be deemed to be 30 per cent of the book profits. In this connection, Mr. Irani invited our attention to the Explanation to s. 115J which defines book profits to mean net profits as shown in the P&L a/c prepared under s. 115J(1A). Mr. Irani contended that under s. 115J(1A), every assessee being a company shall for the purposes of s. 115J, prepare its P&L a/c for the previous year in accordance with Sch. VI of the Companies Act, 1956. He, therefore, submitted that for the purposes of computation of total income under the IT Act the curtain falls on 31st March whereas, the curtain rises for finalization of P&L a/c under Sch. VI of the Companies Act after 31st March. He contended that P&L a/c for the relevant previous year prepared under Sch. VI of the Companies Act can never be prepared before the end of the previous year whereas, the advance tax was payable only during the financial year and, it is for this reason, that the assessee had to pay the entire advance tax before the end of the financial year whereas, the assessee cannot prepare its account under Sch. VI of the Companies Act, before the end of the financial year. He contended that the P&L a/c under Sch. VI of the Companies Act are finalised only after the auditor approves the accounts. He contended that in this case the accounts were finalized on 22nd June, 1989, whereas, the previous year ended on 31st March, 1989. He, therefore, contended that the provisions of s. 234B and s. 234C are not attracted in cases falling under s. 115J as book profits were determinable after the end of the financial year. He gave numerous examples to show the difficulty which will be faced by the companies if interpretation of the Department was accepted. He contended that in a given case, the company may claim deduction for the entire amount whereas, the auditor may suggest spread over the deduction over a period of time. Similarly, there may be receipt which may not be taxable under the IT Act being capital receipt and yet the auditor will say that every receipt under Sch. VI have got to be shown through P&L a/c and the auditor may not allow the assessee-company to show such receipt in capital reserves. He, therefore, contended that the question one must ask is whether as far as book profits are concerned, did the legislature envisage liability on the assessee under s. 234B and s. 234C particularly when such profits are decided after the end of the financial year. It was urged that advance tax was always on estimation of current income whereas, s. 115J was on actuals. He contended that s. 115J contemplates comparison between total income computed under the IT Act and total income as per P&L a/c prepared under Sch. VI of the Companies Act. He contended that under Sch. VI to the Companies Act there was no requirement for preparing P&L a/c on estimated basis. He, therefore, contended that the legislature did not intend the assessee companies falling under s. 115J to prepare its P&L a/c on estimated basis. That, while estimating current income for the purposes of payment of advance tax, the assessee has to see only the provisions of the IT Act. He, therefore, contended that provisions of s. 207 to s. 211 of the IT Act are separate and distinct from s. 115J as the former apply only to the income arising during the financial year whereas, for the provisions of s. 115J the curtain rises only when the accounts are duly audited by the auditor. In the circumstances, it was contended that s. 234B and s. 234C are not applicable to special provisions relating to companies falling under s. 115J as it stood at the relevant time. In this connection, he placed reliance on the judgment of the Karnataka High Court in the case of Kwality Biscuits Ltd. vs. CIT (2000) 159 CTR (Kar) 316 : (2000) 243 ITR 519 (Kar).
Findings on question No. 2
9. We find merit in the contentions advanced on behalf of the Department on question No. 2. According to the assessee, assessment under s. 115J of the IT Act is on a deemed income and, consequently, provisions of s. 234B and s. 234C will not apply. We do not find any merit in this argument of the assessee. Sec. 207 of the IT Act falls under Chapter XVII-C which deals with advance payment of tax. It states that tax shall be payable in advance during any financial year in respect of total income of the assessee which would be chargeable to tax for the assessment year immediately following the financial year. That, such income shall be referred to as current income. The basic burden of the assessee’s argument is that companies falling under s. 115J of the IT Act are assessed on the basis of deemed income which is computed as per Sch. VI of the Companies Act. That, such companies have to compare that total income computed under the normal provisions of the IT Act with the book profits computed under Chapter VI of the Companies Act. That, the accounts of the company under Sch. VI cannot be prepared before the end of the previous year whereas, s. 207 of the IT Act provides for estimation of the ‘current income’ at the end of the previous year. That, s. 207 contemplates estimation of current income by the end of the financial year and on that estimation the assessee is required to pay advance tax . According to the assessee, therefore, interest cannot be levied on account of short payment of advance tax in cases of companies falling under s. 115J. We do not find any merit in this argument. The difficulty faced by the assessee in the matter of computation cannot defeat the liability for payment of advance tax . Under s. 207 of the IT Act, advance tax is payable during any financial year in respect of the ‘current income’. The words ‘current income’ are very crucial. The words ‘current income’ refer to computation of total income under the provisions of the IT Act including s. 115J. Under s. 207 of the IT Act, the words ‘total income’ have been equated to the expression ‘current income’. The matter can be looked at from another angle. The interest which is leviable under s. 234B and s. 234C is compensatory in nature. It has no element of penalty in it. Therefore, it is clear that if there is non-payment or short payment of tax on the current income, then the assessee has to pay interest as the income has accrued to the assessee for the previous year. In our opinion, merely because the curtain raises in the cases of companies falling under s. 115J after 31st March, is no ground for the assessee-company not to pay interest under s. 234B and s. 234C. Under s. 115J, every assessee-company had to compute total income under the Act and, thereafter, compare such total income with the book profits and if the total income computed under the Act was less than 30 per cent of the book profits than the total income shall be deemed to be 30 per cent of the book profits. It is not in dispute that every such company has to prepare its P&L a/c under Sch. VI of the Companies Act after the end of the accounting year/previous year but, once it is found that the total income computed under the Act is less than 30 per cent of the book profits and consequent upon which there is non-payment or short payment of advance tax then, provisions of ss. 234B and 234C are automatically attracted. In this case, previous year ended on 31st March, 1989, and the accounts were finalised on 22nd June, 1989. However, the company came under s. 115J of the IT Act and it was found that the tax liability under s. 115J was Rs. 26,45,004 against which the advance tax paid was only Rs. 15 lakhs and, consequently, there was short payment of advance tax. Hence, interest under s. 234B and s. 234C was leviable. Our view is supported by the judgment of the Gauhati High Court in the case of Assam Bengal Carriers Ltd. (supra) and also by the judgment of the Madhya Pradesh High Court in the case of Itarsi Oils & Flours (P) Ltd. (supra). Consequently, we respectfully disagree with the judgment of the Karnataka High Court in the case of Kwality Biscuits Ltd. (supra)
10. Accordingly, we answer question No. 2 in the affirmative i.e., in favour of the Department and against the assessee. Accordingly, the above appeal is disposed of with no order as to costs.
[Citation : 265 ITR 1]
